Washington Pay Attention: Silver Clouds in Moscow

For the diplomatically stretched United States, there's a possible silver lining in the cloudy financial turmoil in Russia.

Russia's financial regulators today yet again halted trading on the ruble-dominated stock exchange, the MICEX. They acted just after the MICEX opened, and kept traders at bay for two hours before reopening the exchange. At the close of the day, the index had fallen by 6%; it also fell 5.5% yesterday, and is down by about 50% for the year.

Meanwhile, also yesterday Prime Minister Vladimir Putin coughed up $50 billion on top of the previous $130 billion he has injected into Russia's financial system to keep the economy from completely locking up. The subprime collapse is one matter. But the plummet in oil prices is also hurting the country. According to a story today by my friend Charles Clover at the FT, Russia's budget will go into deficit if oil prices fall below $70 a barrel, which isn't the loopy notion it seemed just a month or so ago (they dropped to about $97 yesterday). This latter data point is especially interesting because, when I was researching Putin's Labyrinth in Moscow last year, a Kremlin official told me that the budget would remain in balance at $39-a-barrel oil. What a difference a year makes.

All of this means that Russia's high-flying financial health is wholly different from even a month ago, in addition to that of the western banks and investment banks that have underwritten Russia's foray into global finance.

In a nutshell, there's serious reason to doubt that Russia can raise the money any time soon to carry out its grand energy strategy -- a new natural gas pipeline network stretching from Turkmenistan into Europe.

Washington -- with its myopic focus on Iraq and neglect of its long-cultivated policy on the Caspian Sea -- has been handed a gift of a pause in the seemingly inexorable march of the Nord Stream and especially South Stream pipelines. As O and G readers know, these two pipelines -- championed through the peripatetic work of Putin and President Dmitri Medvedev -- are behind the potent rise of Russian influence in Europe.

A previous posting on this topic provoked reader alarm that Europe will go dark and cold without these new pipelines, an unwarranted reaction considering that Europe uses just half the capacity of the three Russian natural gas pipelines that currently serve it. Nord Stream is arguably a good idea, but South Stream is purely political, a geostrategic ploy to pre-empt the equally political, western-backed Nabucco natural gas pipeline.

How long the pause in Russia lasts depends on who you talk to, but one or even two years are entirely reasonable projections.

That's a window for a Western oil company to get an on-shore natural gas deal in Turkmenistan, which would be key to any resurrection of moribund Nabucco. If the next president, whether John McCain or Barack Obama, rapidly launches a well-considered and -led strategy -- meaning recruiting an American graybeard of the gravitas of Jim Baker or Zbigniew Brzezinski as spearpoint -- he could possibly salvage some of the lost U.S. political and economic influence in the region.

One sure thing is that the window won't remain open. When it closes, Putin will be back as Europe's most dynamic and determined leader.

The CIA, Secretiveness and Jim Giffen's Gamble

Jim Giffen, a New York man accused of passing oil company bribes to Kazakhstan’s president, has asked a federal judge to determine whether U.S. intelligence agencies are purposely withholding documents that the defense says could exonerate him.

In a letter on Giffen’s behalf, his lawyer, William Schwartz, also asks U.S. Judge William Pauley to determine whether his client – whose trial has yet to be scheduled five years after his arrest – has been denied his constitutional right to a speedy trial. Earlier this month, Pauley suggested in court that the delays may have gone on too long.

The Giffen case has attracted attention as the largest Foreign Corrupt Practices Act prosecution since the 1977 law took effect. Kazakhstan President Nursultan Nazarbayev is an unindicted co-conspirator in the case. In Kazakhstan, the case is known as Kazakhgate.

The 67-year-old Giffen doesn’t deny the government’s charges that he passed along some $80 million in payments from U.S. oil companies to Nazarbayev and other officials from the country. But he has invoked a so-called “public authority” defense, asserting that he had reason to believe that U.S. intelligence agencies knew and approved of the payments because Giffen served a useful role for the U.S. as a Nazarbayev confidante. In order to prove his claim, Giffen has requested a trove of documents from the CIA. In an April hearing, a U.S. prosecutor told Pauley that he would produce some of the documents by September.

Giffen in fact had contact with the CIA for more than three decades as a businessman dealing with the Soviet Union and then post-Soviet Kazakhstan. During the Soviet period, he and other American businessmen were effectively required to brief the CIA after visits to the Soviet Union -- it was a price of being permitted to deal with the enemy in a relatively free manner. After the Soviet breakup, Giffen shifted to Kazakhstan, and he continued to make his visits to the agency, something he regularly noted at the time to acquaintances as a seeming sign that he was plugged in at the top in Washington.

In invoking the novel defense, Giffen has seemed at least in part to be gambling that the highly secretive Bush administration would refuse to turn over documents for public review, and that thus some of the charges might be dropped since he couldn't defend himself without the papers. The latest news seems the first indication that the strategy may pay off.

Giffen’s letter – dated Sept. 8 and entered into the court file yesterday – was triggered by remarks made by Pauley in Giffen’s hearing on Sept. 5. In the hearing, assistant U.S. attorney Stephen Ritchen said he didn’t have the CIA documents, and the usually patient Pauley for the first time suggested that the government demonstrate that it is serious about trying the case. He said he might order intelligence officials to appear and explain themselves. According to the latest court docket, Pauley has scheduled a closed hearing Sept. 25, apparently with representatives of the intelligence agencies.

``At some point, the government has to decide whether it wants to go forward,'' Pauley said Sept. 5, as reported in a story by Bloomberg reporter David Glovin, who has covered the case almost from the beginning. ``Oftentimes, there's nothing more effective than having to look at a federal judge and explain why you haven't done what you're supposed to.''

Pauley said, ``Five years -- that in itself is punishment and hardship'' to Giffen. ``I'm reaching the point where I can't let it go on for years.''

Asked why the CIA has not complied with the request for documents, CIA spokesman George Little said in an e-mail response to me yesterday, "The CIA does not, as a rule, comment on matters pending before U.S. courts."

In his letter, Giffen asks Pauley in the Sept. 25 hearing “to determine whether any delays in production to date have been the result of deliberate inaction or indifference on the part of those agencies such that Mr. Giffen’s rights to a speedy and fair trial may have been compromised.”

What To Do About Russia?

The West's biggest problem in the fallout from last month's fighting in Georgia is that it doesn't know what it wants (apart from that all parties should behave as though the events never happened at all). The U.S. and Europe seem only to know what they don't want (which is Russia breathing down their necks).

In this vein, the Economist has spent the last few days running a debate. My friend Lane Greene is moderating replies to the proposition: The West must be bolder in its response to a more assertive Russia.

As one might suspect, many of the replies revolve around indecision on whether Russia should be vilified or praised, and who hit whom first in South Ossetia. Yet it's worth taking a look.

Why Russia's Oligarchs Saved BP, But Georgia Will Not Join NATO

About a week and a half ago, four Russian oligarchs abruptly called off a months-long seige that had BP on the ropes, and gave the British company a settlement that it could have only dreamed of just a day earlier. The company was allowed to keep its 50% holding in the Russian oil company TNK-BP in exchange for concessions that were relatively minor compared with the worst-case scenario -- that, with a loss of much of its Russian holdings, BP might have to merge with Shell or some other Big Oil rival.

Why did take-no-prisoners oligarchs like Viktor Vekselberg and Mikhail Fridman throw BP the lifeline? And why should this not be seen as a case study into how vulnerable Russia is to market forces?

A glance at Russia's current straits is a fairly clear answer to the first question: Russia's stock markets are in free fall. Dollars are pulling out of the country -- some $35 billion since last month's fighting in Georgia. Russia's billionaire oligarchs are in a panic.

The parties claim that they had reached a tentative agreement in July. The Russians claimed that the Kremlin played no role. These strain credulity, particularly the latter. Not to put too fine a point on it, the oligarchs' public announcement of the deal included remarks by First Deputy Prime Minister Igor Sechin and Kremlin economic aide Arkady Dvorkovich.

The likeliest scenario is that the oligarchs got spooked by their exposure to the already-plunging Russian market, that the Kremlin was blind-sided by the magnitude of Western dismay over Georgia, and that both groups decided that they could do with one less scandal on their hands.

But this does not mean that Russia is going to bend -- certainly any time soon -- on Georgia. Prime Minister Vladimir Putin has effectively acknowledged that he overplayed his hand by seizing Georgian territory. But by pulling troops back from Georgia proper and occupying just the breakaway Georgian republics of Abkhazia and South Ossetia, he is merely obtaining what he wanted in the first place.

What is that? When I visited Kazakhstan over the last couple of weeks, I was told that Western oilmen see Russia now holding "psychological control" over the oil-and-natural-gas pipeline corridor through Georgia. It doesn't mean that Russia will attack the lines -- the re-use of force is unlikely, I think, though that threat isn't dismissed by Azerbaijan or Georgia. But it does mean that Russia holds an effective veto over any expansion of them. And, given Russia's influence over Germany, France and Italy, Moscow also holds an effective veto over NATO accession for both Georgia and Ukraine.

And that is an immense Russian achievement -- an erosion in the corridor's previous western-protected status.

Irony at Lehman Brothers: The Stubborn (and Prescient) Ed Morse

Here's one danger of being lionized in one's own lifetime.

Just a few months ago, Goldman Sachs' Arjun Murti, declared "an oracle" for his early prediction of $100 oil, predicted that crude oil prices were headed to $200 a barrel. One financial writer said that detractors of Murti's "superspike theory" of high oil prices would now "eat crow." And when oil reached $147.27 a barrel in July, the soft-spoken Murti was feted day after day.

Today, when oil closed below $100 a barrel for the first time in seven months, at $95.71, Murti looks a lot less far-seeing. His place has been taken by Ed Morse.

The 66-year-old Morse, whom O and G and BW readers heard a lot about in a profile in July, suffered the slights of colleagues in and outside his office at Lehman Brothers while predicting a collapse of oil prices below $100 a barrel based on a different reading of the fundamentals.

Morse said that the market had misread global supply -- where the market saw tightness, Morse saw a growing surplus.

Ironically, Morse has been proven right on the day that his firm declared bankruptcy.

Pushing the issue further, and buttressing Morse's assertions, oil prices may be calibrated a bit differently today. Until now, analysts have focused almost entirely on the tightness of supply -- we're consuming almost the same as what the world's oilfields can produce, so any crisis, like a hurricane for instance, provokes oil analysts and journalists to predict another bout of Murti's superspike.

Yet that isn't what's happened recently. Instead, prices have bumped up a bit, only to fall again once the crisis passed.

Its possible that oil is now in a Wal-Mart age of inventory-on-demand. That is, the market knows that the Saudis, for instance, have a few hundred thousand barrels of spare capacity that they seem willing to switch on and off as the market demands. The same role is played by the U.S. Strategic Petroleum Reserve, which can fulfill a month of American oil demand.

So that the tightness of supply seems less important. And it may take a lot more before Murti's equation again becomes relevant.

The Sweep of Georgia's Impact

I'm just back from two weeks in Kazakhstan, looking at the ripples from the events in Georgia. The short takeaway is that Russia's short, victorious war will be felt for years to come all the way from Central Asia to western Europe. Here is the piece in this week's Business Week.



What doesn't seem to be much appreciated is that the main problem isn't really Georgia. It's that Georgia is the thread hanging off the tattered sweater; you pull it, and the sweater falls apart. Not counting the suddenly transformed politics of the Eurasian continent, but just economics, will Azerbaijan and Georgia manage to widen the Caucasus energy corridor to accommodate another 1.5 million barrels a day of Kazakh oil over the coming years, as Kazakhstan would like? What of hopes to diversify Europe's natural gas supply? The answer to both is "perhaps," but that Russia will have to be accommodated.

What would Russia want in exchange for allowing the corridor expansion to go through? For starters, as it's made plain, it wants all of the Azerbaijan state's natural gas supply, the very same volumes that the State Department is pushing President Ilham Aliyev to ship to Europe. As for Kazakhstan, it's not clear what it will be asked -- President Nursultan Nazarbayev, the balancer of great powers, has already been so deferential to Vladimir Putin that one wonders what more there is to surrender. From Europe, Putin would like continued demand for Russian gas at current or greater volumes.

One thing that's sure is that Russia doesn't have to use its Army again. Having deployed it once, Putin has made his point. Besides, Russian energy pipelines provide it all the leverage it needs without its army.